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Returns Are Gaining Momentum At China Automotive Systems (NASDAQ:CAAS)

editorial-team@simplywallst.com (Simply Wall St)
·3 min read

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, China Automotive Systems (NASDAQ:CAAS) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for China Automotive Systems:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = US$41m ÷ (US$771m - US$364m) (Based on the trailing twelve months to March 2024).

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Thus, China Automotive Systems has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Auto Components industry.

Check out our latest analysis for China Automotive Systems

roce
roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Automotive Systems' ROCE against it's prior returns. If you'd like to look at how China Automotive Systems has performed in the past in other metrics, you can view this free graph of China Automotive Systems' past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that China Automotive Systems has broken into profitability. The company now earns 10% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by China Automotive Systems has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a side note, China Automotive Systems' current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To bring it all together, China Automotive Systems has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 60% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While China Automotive Systems looks impressive, no company is worth an infinite price. The intrinsic value infographic for CAAS helps visualize whether it is currently trading for a fair price.

While China Automotive Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com